What Is Crowdfunding And How Does It Benefit The Economy

With the passing of President Obama’s JOBS Act this past April, the word of the day seems to be crowdfunding. While this concept has arguably been around for centuries, it is still formally recognized as a new industry to many consumers, particularly those outside the United States. Crowdfunding is by definition, “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” Check out this video to get a clearer idea of the step by step process of crowdfunding.

In a seemingly nonstop recession wave, small businesses are struggling more than ever to stay afloat, and entrepreneurs are not facing great odds. Crowdfunding offers these individuals a chance at success, by showcasing their businesses and projects to the entire world.

There are numerous donation crowdfunding platforms where entrepreneurs can safely ask for capital such as Kickstarter, Indiegogo, RocketHub, and investment platforms like 1000 Angels, the company I co-founded, to name a few. While each site offers their unique spin, the general concept is the same across the board. Project creators can create a profile typically containing a short video, an introduction to their project, a list of rewards per donation, and some images to elaborate. The idea is to create a compelling message that readers will be drawn towards.

The idea of "its not what you do, but why you do it," really hits home here. By focusing on a bigger purpose, the driving force behind a brand, project creators will be able to create a unique community of likeminded individuals. Each campaign is set for a goal amount of money and a fixed number of days. Once the project is launched, each day will be counted down and the money raised will be tallied up for visitors to follow its success.

Instead of traditional investors, crowdfunding campaigns are funded by the general public. Typically, most successful startup fundraising efforts receive about 25-40% of their revenue from their first, second and third degree of connections. This could include friends, family, work acquaintances, or anyone that the owner is connected to, including their second and third degree connections. Once a project has seen some traction, unrelated consumers start coming out of the woodwork to support campaigns they believe in.

There is a huge misconception that creating a successful crowdfunding campaign is as simple as hitting submit and waiting for it to go viral. While this has happened to many brands, the vast majority of projects will require a decent amount of effort on the part of the project creator.

Utilizing social media, creating email distribution lists before the project launches, contacting local media, are all necessary steps to take if you are serious about your goal. Remember, this is not a platform to ask for a handout. If you expect people to join your cause, you had better be prepared to prove your salt.

There are three main reasons why people unconnected to a project or business would support it:

1. They connect to the greater purpose of the campaign

2. They connect to a physical aspect of the campaign like the rewards

3. They connect to the creative display of the campaign’s presentation

Knowing these points is extremely key to creating a successful campaign. Each campaign should contain a powerful reason behind the idea, exciting and unique rewards, and an eye-catching display. Video definitely plays a huge role in this last point, and novice film makers might want to consider taking the time to ask for assistance from an educated friend, or seeking a crowdfunding platform that assists with the video editing. In this age of the digital reign, many consumers will stop reading your campaign if they don’t connect to the video, so this is really the gateway to your proposal.

Another common misconception is that crowdfunding is just useful for small businesses and startups. This is definitely untrue. While crowdfunding creates a funding opportunity that certain smaller businesses may not have received in the traditional way, it also is a great outlet for more established companies.

These businesses may be interested in expanding their product range, and reverse engineering the investment could be a good idea, not to mention the excitement they can generate before the launch. Crowdfunding has proven itself as a great asset in sourcing potential customers and growing an audience.

One prime example of this is Villy Custom Bicycles. Already a successful company, having been featured on ABC's Shark Tank and sponsored by Mark Cuban and Barbara Corcoran, Villy Custom didn't need to raise funds to support their business. Gearing up to launch a new line of Glow in the Dark bicycles, Fleetwood Hicks, the founder of Villy Custom, decided to run a crowdfunding campaign on Onevest to test the market reaction. Within the first two weeks he successfully reached his goal of $10,000, received an overwhelmingly positive affirmation towards his new line, and had a number of orders before production had even started.

A great additional benefit to crowdfunding is its economical helping hand. Anything that aids in generating revenue is desperately needed in our sluggard economy, and crowdfunding has proven to be a powerful force. Not only is it pumping small businesses with desperately needed lifeblood, but it is also encouraging entrepreneurs to continue creating even in the face of these slow times.

In sum, crowdfunding is a great asset to businesses and entrepreneurs, generating much needed revenue and increasing the customer base, all the while aiding our country’s economy.

Serial founder, product specialist and angel investor, I have been leading CoFoundersLab.com, an entrepreneurial-minded marketplace for people looking to build or help grow early-stage businesses, and 1000 Angels the invite-only highly curated venture community. Before Onev...